Law commission proposals to reform trust law would bring change for hundreds of thousands of family trusts and place new obligations on their trustees.

While the proposals fall short of the revolution trust law critics may have hoped for, revolution was never the intention, says Law Commission president Grant Hammond.

The commission aims to bring order and clarity to an area of law central to the economic life of the country, but which has been left untouched by Parliament for more than half a century. But they are not designed to disrupt or limit trust use, just to lift the quality of trusteeship.

"For people to discharge their obligations satisfactorily, they need to know what they are expected to do," says Hammond.

"The path we have taken is to get the basic model right so everybody knows what it is and everybody knows where to find it. It is rather hard to do in the present state of the law."

The aim is to have a Trust Act which codifies trust law into a single document that everyone can refer to.

The proposals include measures such as requiring trustees to inform beneficiaries that they are beneficiaries, and forcing trading trusts to reveal their existence to people dealing with them (see box).

The aim is to define a "bottom line" in trust law and trusteeship that sets the standard for what is acceptable and what is not.

"You might describe it as a conservative exercise," says Hammond. "It is not a revolutionary one. It doesn't seek to set the law of trusts on its head."

For trustees in charge of ordinary "express" trusts (formed by private individuals) this includes setting out the basics of a trustee's duties, including what duties can be contracted out of, and which cannot.

Among those things that cannot be contracted out of is a duty to act with care and skill. That will cause some unease because, currently, trust deeds and trustee indemnities do allow people to mismanage trusts without legal comeback as long as they do not do so dishonestly.

Many enterprises are run through trusts and there has been concern that people and companies dealing with them, and most importantly extending credit to them, may be unaware they are dealing with a trust and not a company or sole trader.

Although the figures do not provide a complete picture, the number of income-earning trusts has increased dramatically from 164,800 in 2000-2001 to 237,800 in 2009-2010.

"It is quite significant, although it has gone unremarked. It is quite possible that we have more business being conducted through trusts than through companies," Hammond says.

He has high hopes Parliament will pick up the proposals and make them law, dismissing fears that MPs' personal interests - 69 of 121 MPs report in the register of member interests that they are beneficiaries of family trusts, including 46 of 59 National MPs - will derail any attempt to bring in tougher laws around trusts.

"I know many parliamentarians do have trusts," Hammond says. "Our job is to recommend the best model we can recommend. If that touches on parliamentarians, then so be it. We should not be afraid of that."

Some areas of controversy have been skirted, such as deliberately not proposing a legal test to determine when a trust is a "sham", and not restricting the use of trusts in areas where they would defeat social policy and social good, notably the use of trusts to shield the assets of business people from creditors, something that has caused fury among finance company investors and creditors of failed property developers.

Also excluded is the idea of creating a trust ombudsman, or a regulator to oversee adherence to trust law, both of which would be costly.

Some trust practitioners fear the issue of trusts in property relationship disputes could derail the proposed reforms.

Bill Patterson, a barrister and expert in trust law, says the importance of trusts was immense in the economy, and while there was consensus that the Property Relationships Act needed reform, it should be tackled in a separate reform programme.

"The PRA needs dealing to, but you can't deal with it as a tack-on," he says. "This should be about reforming trust law, not picking up a whole batch of other things."

The media's immediate focus on divorcing couples was disappointing, he says, and he hoped the controversy wouldn't kill the Law Commission's proposals.

"I hope it won't get consigned to the dustbin of history."

Submissions on the Law Commission's proposals close in February.

PROPOSED TRUST LAWS INCLUDE :

1. Trustees will no longer be allowed to contract out of their duty to act honestly and in good faith for the benefit of the beneficiaries or a permitted purpose or to exercise care and skill.

2. Other duties that can't be contracted out of include: The duty to understand and adhere to the terms of the trust; the duty to account to the beneficiaries for trust property; and the duty to exercise trustee powers for a proper purpose.

3. The duty to inform beneficiaries that they are beneficiaries.

4. Giving the District Court jurisdiction over cases involving an amount of up to $500,000, up from $200,000, to improve justice access.

5. Trustees must retain a copy of the trust deed; any variations to it; a list of trust property; any records of trustee decisions; any written contracts entered into; and accounting records and financial statements.

6. Giving courts the power to remove trustees who are convicted of a dishonesty offence.

7. Amending section 25 of the Companies Act 1993 to require a company, when acting as a trustee of a trust, to clearly describe its status in communications in the form "X Ltd acting as trustee for Y trust".

8. Providing for a mechanism appointing a liquidator or receiver of a trust.

9. Giving beneficiaries power to apply to a court to have a trustee decision reviewed if there are reasonable grounds that a trustee acted unlawfully.

10. Giving trustees a power to use dispute resolution to settle disputes between trustees and beneficiaries or between trustees and third parties where none is given by a trust deed.